Thursday, March 15, 2012

During the last few years, the expense ratios of actively
managed TIAA-CREF mutual funds have risen. For example, the expense ratio of the TIAA-CREF
Large Cap Value fund retirement class rose from 0.47 in 2003 to 0.77 in 2011.
Similar increases occurred in other actively managed TIAA-CREF funds. This is
despite the fact that the average expense ratio of stock mutual funds declined
over the same time period. (see p.64 of 2011 Investment Company Fact
Book). TIAA-CREF expense ratios are still lower than the average expense ratio
across all stock mutual funds, but since most of TIAA-CREF mutual funds are
held inside retirement plans, we should compare the TIAA-CREF expense ratios to
expense ratios of mutual funds inside retirement plans. According to this ICI study, the average
expense ratio inside retirement plans is only 0.71 – a bit lower than many of
TIAA-CREF’s actively managed funds.

Interestingly, expense ratios on TIAA-CREF’s index funds
have declined somewhat. The expense ratio on the retirement class of TIAA-CREF’s
longest running index fund, the S&P 500 index fund, declined from 0.44 in
2003 to 0.34 in 2010. Index funds, especially S&P 500 index funds, have
become a commodity which drives down expenses. TIAA-CREF index funds in the
retirement class are still about three times as expensive as Vanguard’s or
Fidelity’s index funds, so perhaps a mild decline in cost is to be expected.

The allocation of assets between actively and
passively managed funds has always influenced the overall cost of a retirement
plan. The widening gap between the costs of actively and passively managed
funds magnifies the effect of allocation between actively and passively managed
funds on the overall cost of the plan. Informing participants about the importance of
costs on long-term performance seems more relevant than ever. In addition,
plan sponsors could mitigate the rising costs of TIAA-CREF mutual funds by
insisting on institutional share class , which some very large plans are beginning
to offer. The institutional class has expense ratios of about 20 basis points
lower than the retirement class.